Microsoft Offers OS Discounts To Battle Linux

Just days after Microsoft's iLoo public relations snafu where the company's U.K. division floated a trial balloon for an unbelievable Internet-enabled portable toilet -- comes news that the company will go to virtually any length to battle Linux in the lucrative operating system market.

According to reports published in the Thursday edition of the "International Herald Tribune," Microsoft is prepared to draw on an internal slush fund to sell its products at deep discounts, or at last resort, give them away, when it runs up against Linux in contests for big government and institutional contracts.

In internal memos written last summer and obtained by the paper, then top Microsoft sales executive Orlando Ayala -- who has recently gone on to oversee sales to small- and mid-sized businesses, and to expand the company's Business Solutions partnering channel -- outlined the strategy to keep Microsoft in its leading position as the purveyor of desktop system software.

"Under NO circumstances lose against Linux," Ayala said in the July memo.

The memo targeted markets in Latin America, Africa, the Middle East, India, and China as those to initially focus on with the discounting fund, reported the Tribune.

According to the report, Microsoft's strategy is to offer deep discounts, or more, when it looks like the company will lose contracts to Linux providers. "It is important that we have a way to address large PC purchases that involve low-cost/no-cost competitors in the education (and government) sectors, especially in emerging markets," Ayala said in one memo. The 'Education and Government Incentive Program,' the name tagged to the discount fund, was to be used "only in deals we would lose otherwise."

In response, Micrsoft spokesman Jim Desler said that the incentive program mentioned in Ayala's memos was "developed to respond to a competitor dropping prices in those geographic areas." IBM, said Desler, was the competitor Microsoft was reacting to. "As a technology leader, we develop programs that allow us to compete."

If true, the discounting tactics sketched out by Ayala could raise eyebrows -- and more -- in regulatory agencies both here and in the European Union that have been scrutinizing Microsoft's headlock on the operating system market. Steep discounts such as those detailed in the leaked memos could run Microsoft afoul of regulations in Europe, the Herald Tribune report mused. Under European law, companies that have a dominant position in a market are prohibited from offering discounts designed to hinder competition.

Microsoft's Desler defended the practices of such discretionary funds as not only "very common" but "fully compliant with all laws and regulations. They were developed in close consultation with our legal team," he added.

While Microsoft owns the lion's share of the desktop operating system market -- over 90 percent according to analysts -- it's been faced with increasing competition from Linux on both the desktop and in the server market. On Tuesday, Gartner, Inc. released a report detailing how many countries' governments, including some in the geographic areas targeted by Microsoft for discounting, are exploring alternatives to Microsoft, Linux among them.

Governments in China, Japan, Singapore, Malaysia, Australia, and several in Europe and South America are encouraging their departments and businesses to support a combination of Linux, other open-source software, and local vendors, said Gartner.

"These countries believe they can spark their local IT industries and thus avoid having to export increasing amounts of their gross domestic product to U.S.-based companies," said David Smith, a vice president at Gartner in a statement.

Such 'dump Microsoft' efforts aren't limited to other countries. Some state governments in the U.S., for instance, are eager to jump onto the Linux bandwagon. In early March, Oregon became the first state to introduce a bill that would require state agencies to consider open source software when evaluating system, network, or software purchases.

"I think there are a couple of realizations going on at Microsoft," said Michael Cherry, an analyst at Directions on Microsoft who covers operating systems, responding to the news of the discounting plan. "One is that Linux isn't going to go away. The other is that Linux is improving at a very, very rapid rate." He noted the move of Linux from being primarily a competitor in the server market to one increasingly seen as viable on the desktop. "That's concerning Microsoft, obviously."

As a real world example of Microsoft's aggressiveness in protecting its market share and beating back competition, Cherry cited the recent drop by Microsoft of the price of its Windows CE operating system, which is used in devices such as handhelds. "They dramatically dropped the price," he said, "and in direct answer to the increasing share of Linux as an embedded operating system."

But a bigger problem, according to Cherry, and perhaps even scarier to the Redmond, Wash.-based giant than Linux, is what he calls the 'just good enough' syndrome.

"Microsoft is hearing from users who, for instance, are running Windows 98 with Office 97 that their software is 'just good enough,'" he said. "Not only are people moving to Linux, but they're not upgrading."

Doron Kempel says selling hyper-convergence can be challenging for solution providers, but success will come from taking business from competitors that are unprepared or hesitant to embrace the technology.